Court Faults First Sale Arguments For Lack of Support From Statutory Text

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At a Nov. 8 argument before the U.S. Supreme Court in a case based on the importation of gray-market luxury goods, justices suggested that both parties were arguing for interpretation of provisions of the Copyright Act that required the insertion of qualifications not supported by the text of the relevant statutory language (Costco Wholesale Corp. v. Omega S.A., U.S., No. 08-1423, argued 11/8/10).

The gray-market luxury goods in question were wristwatches made in Switzerland. However, the act giving rise to the cause of action in this case was not the importation of the wristwatches themselves, but rather of the logo of the watchmaker, which appears on the watch faces, over which it claims copyright interest.

The dispute centered on interpretation of one phrase in the text of the first sale doctrine, as codified in the Copyright Act, which prevents copyright owners from exercising control over the disposition of a copy of a work once that copy has been legally made and sold to a consumer.

Imported Watches Challenged.

The company that operates the Costco chain of membership retail warehouses sought to overturn a ruling by the U.S. Court of Appeals for the Ninth Circuit barring it from using the first sale doctrine as a defense against a claim of copyright infringement by the maker of Omega brand wristwatches.

Costco Wholesale Corp. had obtained the watches from parties who had legally acquired them from authorized distributors overseas and had imported them into the United States. Omega S.A. asserted that another provision of the Copyright Act, 17 U.S.C. §602(a)(1), allowed it to block importation of the wristwatches because it had not authorized those particular watches to be sold in the United States.

Section 602(a)(1) states:  

Importation into the United States, without the authority of the owner of copyright … of copies … of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies …. 




The first sale doctrine, 17 U.S.C. §109(a), states:  

[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. 




The U.S. District Court for the Central District of California granted summary judgment for Costco after finding the first sale doctrine applicable. However, the Ninth Circuit reversed, after concluding that the doctrine did not apply to foreign-made goods (76 PTCJ 658, 9/12/08).

Argument of Petitioner.

Arguing for Costco, Roy T. Englert Jr. of Robbins, Russell, Englert, Orseck, Untereiner & Sauber, Washington, D.C., asserted that the statutory phrase--“lawfully made under this title”--obviously applied to authorized copies made and sold in the United States but also could apply to copies made overseas.

The touchstone in this argument was the Supreme Court's decision in Quality King Distributors Inc. v. L'Anza Research International Inc., 523 U.S. 135, 45 USPQ2d 1961 (1998), which applied the first sale doctrine in a case in which the copies in question had been made in the United States, sold abroad, and re-imported into the country, a “round-trip” situation.

As in the instant case, the copyright owner in Quality King had not authorized the distribution of the copies within the United States. If the Ninth Circuit's ruling were to be affirmed, Englert argued, this would create an incentive for copyright owners to outsource the making of copies overseas, to take advantage of the extra control given to them over foreign-made copies.

“According to the Ninth Circuit …, Congress intended to treat foreign manufactured goods better in this respect than goods made in the United States,” Englert said. “It is wildly implausible that Congress had any such intent.”

Englert also indicated that the phrase “lawfully made under this title” appears in other provisions in the Copyright Act and that in these provisions, the phrase does not restrict the meaning to U.S.-made copies.

According to Costco's position, a copyright holder like Omega would be able to bar authorized copies made abroad under Section 602 only if it retained the U.S. rights to make and distribute copies but had granted another party exclusive rights to make and distribute copies to the non-U.S. market in question.

“Why does it matter?” Justice Sonia M. Sotomayor asked.

“It matters … because of the underlying rationale of the first sale doctrine and the underlying rationale of the import ban in Section 602,” Englert replied. “The purpose of the first sale doctrine is to make sure that the copyright owner gets one, and only one, recompense for each copy, for each lawfully made copy.”

However, Sotomayor said, a copyright owner that has sold exclusive foreign rights has presumably already been compensated under such a contract for the making and distribution of those foreign copies.

“He gets paid for those rights,” she said. “Why should he now have any additional rights to bar that authorized copy from being imported into the United States?”

The reason, Englert said, is to be found in the legislative history of Section 602, which lists certain examples of the kinds of imports that were meant to be blocked.

Sotomayor then asked whether there was a distinction between an assignment of overseas rights on the one hand and licensing of exclusive overseas rights on the other hand.

“We don't draw a line between those two,” Englert said. “The line … depends on whether the copyright owner has given exclusive foreign rights to someone else. … And to give meaning to Section 602 and to be completely consistent with the rationale of the first sale doctrine, one must draw some line. Drawing a line between the U.S. manufacturer and the foreign manufacturer makes no sense. It's not consistent with the purpose of anything.”

Justice Stephen G. Breyer then tried to address the issue by putting it terms of a broader issue, asserting that the first sale doctrine should apply when there has been a sale. He resisted the idea that the line should be drawn on the basis of whether certain contractual provisions were in force.

“I mean, I don't know what all these contracts say. There are hundreds of thousands of them, if not millions. What I don't see is why you don't just say: The first sale doctrine has always meant there was a transfer or sale.”

Breyer noted that this argument had not been presented in the briefs in this case and wondered, “There must be some problem with what I say. So what is it?”

Englert again referred to the legislative history of the statute, saying that the issue is with “second and subsequent sales.”

“In a situation in which rights have been divided and exclusive territorial rights have been given in two different countries, or to put it in copyright language, … when the copyright owner has divided its rights because an innovation of the '76 act, the Copyright Act, the copyrights became divisible …”

At this point, Englert was interrupted by Justice Antonin G. Scalia: “Where do you get that in the text? I mean, that's lovely …. Does your position make any sense with regard to the text? … Where? Where is that limitation in the text? … I'm talking about your limitation on exclusive rights abroad versus nonexclusive rights abroad. Where can you possibly find that in the text?”

“You cannot,” Englert conceded.

“Oh. Well, that's the end of it for me,” Scalia quipped.

But Scalia came back to the point: “You pulled out of the sky this distinction between having created exclusive rights abroad and having created nonexclusive rights abroad. Where does that come from?”

Breyer also sought to pin down the legislative history argument: “Where in the legislative history does it say that the point of 602 is to prevent a foreign publisher from selling copies to a distributor and then that distributor resells them to the United States?”

“[T]o be fair about what the legislative history says, it is statements by witnesses. It is not statements by committee, so it's a little bit hard to tell where they're drawing the line,” Englert conceded.

“Oh. In other words, somebody wanted that. I understand the industry wanted it. But … is there anything in there that suggests that this is what Congress wanted to do, members of Congress? EvenIdraw the line somewhere.”

“Let me write that down,” Scalia interjected, prompting laughter in the chamber.

Argument of Respondent.

Aaron M. Panner of Kellogg, Huber, Hansen, Todd, Evans & Figel, Washington, D.C., then rose to argue for Omega, and faced a very similar criticism from the justices.

As he began his argument, Justice Samuel A. Alito Jr. interrupted him to ask him for his interpretation of the word “made” in the phrase “lawfully made under this title.”

“Well, 'made' certainly includes the creation of the physical copy,” he replied. “It also includes the addition of any necessary intellectual property rights that would permit distribution in the United States. So, that is to say that we understand Section 109(a) should be read to reach a situation in which a copy has been subject to an authorized sale in the United States.

Alito responded. “See, I'm with you, and I think … the text supports you up to the point where you add the qualification. But once you've added that qualification, I think you're outside the text, just as Costco is outside the text with the qualification that they had.

Breyer again pursued his argument that a first sale should be the key to answering this question: “[Section] 109 is an exception from 106”--which defines the exclusive rights of a copyright owner--“so it's automatically an exception from 602.”

“The … point is that Section 602(a)(1) is designed to permit a U.S. copyright owner, as Costco admits … to exclude legitimate copies that are made overseas.”

Breyer pressed the point, however, that this provision still created certain rights even if subject to the first sale doctrine.

“I think that the difficulty … is that … Costco's reading tends to eliminate any practical effect for Section 602(a)(1) by making it not apply to legitimate copies or it makes substantive rights turn on formalities of title, which is quite inconsistent with the structure of the Copyright Act,” Panner said.

In understanding the phrase, “lawfully made under this title,” Panner said that “where a U.S. copyright owner has exhausted rights with respect to a particular copy by having been compensated for a right that has been invested into that copy, that can be included in the making.”

Scalia: “That's just not in the text. I mean, like the other side, in order make your theory of the text appear reasonable, you have to bring in a skyhook with a limitation that finds no basis in the text.”

Sotomayor then brought up the interpretation of Quality King, objecting to the suggestion that what made the importation in that case lawful was the fact that the copies had originally been made in the United States.

“Where in Quality King, do you see anything … turning on where the goods were made? I read the decision and it barely mentions that, if at all. Its whole premise was on what the owner did: Did the owner sell this copy?”

Panner replied that the question of whether the copies were “lawfully made under this title” was not in dispute in Quality King.

He asserted that a licensing agreement permitting importation into the United States could trigger the “lawfully made under this title” language, even if the copies were made overseas.

“So you are saying that whether or not it's lawfully made depends on something that happens after it's made?” Chief Justice John G. Roberts Jr. asked.

“In a particular case, it might be,” Panner replied.

Government's Argument.

Malcolm L. Stewart of the Office of the U.S. Solicitor General, Washington, D.C., argued for the government as amicus curiae, in support of Omega.

He began by stating that the government's position was that “lawfully made under this title” required that the copy in question be made in the United States.

“What is your answer to the argument that if 'lawfully made under this title' means basically made in the United Sates, that provides a great incentive to manufacture goods abroad and that can't possibly be what Congress intended?” Alito asked.

“It's true that this creates something of a potential incentive to manufacture abroad,” Stewart conceded. However, he pointed out that from the point of view of an importer, this statutory scheme could make it harder to get foreign-made goods into the United States anyway.

Stewart then tried to draw a distinction between the first sale doctrine as codified in Section 109 and the first sale doctrine as set forth under precedent, beginning with Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908).

According to Stewart, following Bobbs-Merrill, Omega had not put the watches in question into the stream of commerce and thus had not exercised its rights under Title 17, and, thus, Section 109 was not applicable.

“Section 109(a) is simply a safe harbor. It doesn't prohibit anything,” Stewart argued. “Section 109(a) says if your conduct falls within these contours then what you are doing is legal, whether or not it would otherwise violate the Copyright Act.

Should 109(a) not apply, he said, the conduct in question might still be lawful under other provisions of the statute.

Roberts objected: “That's the problem I have with your position. You are suddenly saying … these issues have to be resolved not within the confines of the Copyright Act, but then you have to look to … common law as well, which is a very confused situation.”

Commentator: Outcome Uncertain.

Steve S. Chang of Banner & Witcoff, Washington, D.C., said that early on in the oral arguments the court seemed to be more “animated” in favor of Costco. Later, however, the case appeared to become “kind of close”--although the court may have still have been “slightly leaning” toward Costco. Chang, who was on hand for the arguments, said that the proceedings were “very well attended.”

Scalia's questions reflected his tendency to stick to the strict language of the statute, according to Chang. However, he appeared more willing to accept Omega's interpretation of that language, Chang suggested.

Meanwhile, in Chang's view, Breyer seemed to be looking for a “practical and workable test”: if a copyright owner made a sale, why look at whether it was “lawfully made,” or where it was made before you allow the first sale defense to allegations of copyright infringement? Breyer seemed concerned that restricting the defense in such a way would be unfair to consumers, who shouldn't have to care whether the goods they buy pass muster under the Copyright Act. If the court adopted Omega's narrow definition of the first sale doctrine, a shopper might be concerned about breaking the law simply by buying a wrench at Home Depot.

The general discussion before the court, however, seemed reflect a consensus that people have been living with various distribution restrictions for decades, and that restrictions on gray market watches are nothing new.

Chan, whose practice is primarily in patents, said that however the court rules on the Copyright Act's statutory first sale doctrine could shape the analogous common law patent exhaustion doctrine.

Chan also noted that Justice Elena Kagan recused herself and so was not present at the oral arguments. With Kagan sitting out the case, he said, the court could end up with a 4 to 4 split, automatically letting stand the ruling below in favor of Omega.

By Anandashankar Mazumdar

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